Reckitt Benckiser Group plc (LON:RB.) has agreed to sell its food business to US-based McCormick & Company Inc. (NYSE:MKC) for US$4.2bn (£3.2bn) in an effort to streamline the business and cut debt.
The decision to sell the food division, which includes the French’s, Frank’s RedHot and Cattlemen’s brands, to the seasoning and sauce manufacturer follows a strategic review.
The UK consumer goods giant is shifting its focus to its more profitable health business, including its Mucinex cold and flu medicine, Nurofen tablets and Durex sexual health products.
In its most recent trading update, the company reported a 15% increase in first quarter sales to £2.643bn, as a strong performance in the health division offset headwinds in its Scholl/Amopé footcare products.
Proceeds of the sale of the food unit will be used to reduce debt, Reckitt said. The company had net debt of £1.3bn at the end of last year.
"Following the acquisition of Mead Johnson Nutrition, this transaction marks another step towards transforming RB into a global leader in consumer health and hygiene, ensuring we continue to deliver for shareholders and give people innovative solutions for healthier lives and happier homes,” said chief executive Rakesh Kapoor.
Reckitt completed the US$16.6bn acquisition of Mead Johnson Nutrition, maker of baby formula, last month.
Reckitt's food disposal cuts the mustard, analysts say
Shares rose 1.40% to 7,923p in morning trading as the news of its disposal was well-received by analysts.
Whitman Howard said the £3.2bn deal was better than the £2.0bn anlaysts had expected Reckitt would fetch for the food division. It reiterated a 'buy' rating and target price of 9,000p.
"Critically, the £3.2bn represents additional funding for Reckitt Benckiser to continue to consolidate the consumer health space, where it makes significantly superior margins to a number of the incumbents, notably large pharmaceuticals companies," said Whitman analyst Chris Wickham.
"Moreover, the sale price tag was a multiple of the £1.0bn, which we factored into our analysis in a 24th June 2015 report, Reckitt Benckiser – Consumer health drives case for £69."
Shore Capital said the consideration reflected an "very attracitve" enterprise value/underlying earnings (EBITDA) multiple of about 25 times, compared to Reckitt's broader multple of 20.2 times.
But the broker repeated a 'hold' rating and target price of 7,812p, saying that despite the attractive valuation the deal is expected to be modestly earnings dilutive.